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What Challenges Do the Central European and Mediterranean States Face in Trying to Join the Third Stage of European Monetary Union?

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What Challenges Do the Central European and Mediterranean States Face in Trying to Join the Third Stage of European Monetary Union? Fordham International Law Journal Volume 28, Issue 1 2004 Article 3 What Challenges Do the Central European and Mediterranean States Face in Trying to Join the Third Stage of European Monetary Union? Andrej Fatur∗ ∗ Copyright c 2004 by the authors. Fordham International Law Journal is produced by The Berke- ley Electronic Press (bepress). http://ir.lawnet.fordham.edu/ilj What Challenges Do the Central European and Mediterranean States Face in Trying to Join the Third Stage of European Monetary Union? Andrej Fatur Abstract One of them is the need to satisfy the conditions of full membership in the Economic and Monetary Union (”EMU”) and the adoption of the Euro as their official currency. The Article then sets out the procedure to join the system for coordinating national currency exchange rates to the Euro, called the Exchange Rate Mechanism II (”ERM II”) and presents the economic situation in the new Member States in light of the convergence criteria. This gave birth to the so-called Pre- Accession Fiscal Surveillance Procedure (”PFSP”), which aims to prepare the new Member States for participation in the multilateral surveillance and economic policy coordination procedures cur- rently in place in the EU as part of EMU. The Member States which satisfied the convergence criteria and entered the final stage of EMU, thus joining the centralized monetary policy of ECB and accepting the Euro as their currency, obviously should continue relatively strict budgetary policies and continue to avoid excessive deficits. Hence, it is extremely doubtful whether new Member States will be allowed to adopt the Euro after participation of fewer than two years in ERM II. No mention is made of real convergence as a criterion for entry into the third stage of EMU and adoption of the Euro. LL.M. PERSPECTIVE WHAT CHALLENGES DO THE CENTRAL EUROPEAN AND MEDITERRANEAN STATES FACE IN TRYING TO JOIN THE THIRD STAGE OF EUROPEAN MONETARY UNION? Andrej Fatur* INTRODUCTION Following the ratification of the Treaty of Accession,' signed in Athens in April 2003, ten Central European and Mediterra- nean States2 joined the European Union ("EU") on May 1, 2004. This event undoubtedly represents one of the most striking and far-reaching achievements in the history of both the new Mem- ber States and of EU. Less than fifteen years ago, all new Mem- ber States' regimes (except Cyprus and Malta) were based on centrally-planned economic and socialist values. In order to * Dean Acheson stagiaireat the European Court of Justice, Luxembourg starting January 2005; LL.M. in International Trade and Business Law, Fordham University School of Law, 2004; M.Sc. in Commercial Law, University of Ljubljana School of Law, 2000; LL.B., University of Ljubljana School of Law, 1997; worked as senior associate attorney in corporate law firm Lukancic in Ljubljana, Slovenia; admitted to the Slove- nian Bar, 2001. The author would like to thank Professor Roger Goebel for his insight and suggestions. The author greatly appreciates the dedication of the editors and staff of the Fordham InternationalLaw Journal in bringing this Article to publication. Finally, he would like to extend his thanks to his parents for their unconditional support in pursuit of his studies. 1. Treaty between the Kingdom of Belgium, the Kingdom of Denmark, the Fed- eral Republic of Germany, the Hellenic Republic, the Kingdom of Spain, the French Republic, Ireland, the Italian Republic, the Grand Duchy of Luxembourg, the Kingdom of the Netherlands, the Republic of Austria, the Portuguese Republic, the Republic of Finland, the Kingdom of Sweden, the United Kingdom of Great Britain and Northern Ireland (Member States of the European Union), and the Czech Republic, the Repub- lic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia, the Slovak Republic, Concerning the Accession of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic to the European Union, O.J. L 236, (2003) [hereinafter Treaty of Accession]. 2. Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia. See id. 146 FORDHAM INTERNATIONAL LAWJOURNAL [Vol. 28:145 fully comply with the strict regulation of the integration process set forth by EU, the new Member States had to make tough (and often extremely unpopular) reforms to transform their countries into modern democracies and functioning market economies.3 Nevertheless, certain undeniably difficult challenges still lie ahead. One of them is the need to satisfy the conditions of full membership in the Economic and Monetary Union ("EMU") and the adoption of the Euro as their official currency. In accor- dance with the provisions of the E.C. Treaty4 and the Athens Treaty of Accession,5 new Member States participate in EMU from the date of accession as a Member State, though in a spe- cial form. This Article presents the challenges that the new Member States face in trying to join the final stage of EMU. Taking into consideration the complexity and broad implications of this pro- cess, this examination is limited to legal and selected economic issues. This Article has four main components. First, it outlines the general features of EMU and its institutional structure. Next, this Article presents the measures already taken by new Member States with regard to the free movement of capital and EMU, accompanied by a review of the existing legal framework of EMU and a discussion on the policy implications for the new Member 3. See Roger J. Goebel, Joining the European Union: The Accession Procedurefor the Central European and Mediterranean States, 1 Loy. U. CHI. INT'L L. REV. 15, 37-45 (2004) [hereinafter Goebel, Joining the European Union] (outlining reforms carried out by new Member States to meet economic standards required for accession); see also Copenha- gen European Council, Conclusions of the Presidency, 26 E.C. BULL., no. 6, at 12-16 (1993) [hereinafter Copenhagen European Council] (declaring that all of the Central European Nations that entered into Europe Agreements and might ultimately join the European Union ("EU"), must satisfy three pre-conditions, known as the "Copenhagen Criteria": 1) stable institutions guaranteeing democracy and the rule of law, with full respect for basic human rights and the protection of minorities; 2) a functional market Economy, with free market competition, and the ability to "cope with competitive pres- sure and market forces within the Union;" and 3) the ability and the administrative infrastructure necessary to fulfill all of the obligations of membership, including that in the Economic and Monetary Union). 4. Consolidated version of the Treaty establishing the European Community, art. 122, O.J. C 325/33, 37 I.L.M. 79, incorporating changes made by Treaty of Nice amend- ing the Treaty on European Union, the Treaties establishing the European Communi- ties and certain related acts, Feb. 26, 2001, O.J. C 80/1 (2001) (amending Treaty on European Union ("TEU"), Treaty establishing the E.C. ("E.C. Treaty"), Treaty establish- ing the European Coal Steel Community ("ECSC"), and Treaty establishing the Euratom and renumbering articles of TEU and E.C. Treaty) [hereinafter E.C. Treaty]. 5. Treaty of Accession, supra note 1, art. 4, O.J. L 236. 2004] CENTRAL EUROPEAN AND MEDITERRANEAN STATES 147 States after joining EU. The analysis is focused on the Treaty- based conditions for attaining the final stage of EMU, commonly called the convergence criteria, their legal basis, and possible ap- plication within the new Member States. The Article then sets out the procedure to join the system for coordinating national currency exchange rates to the Euro, called the Exchange Rate Mechanism II ("ERM II") and presents the economic situation in the new Member States in light of the convergence criteria. In its fourth and final part, this Article dis- cusses the necessary measures to be adopted by the new Member States and sketches the formal procedure to join the third stage of EMU. Finally, the Article provides an estimate of the time schedule for fulfillment of the convergence criteria in the new Member States. I. THE INSTITUTIONAL STRUCTURE OF ECONOMIC AND MONETARY UNION ("EMU") A. Institutional Structure of EMU6 1. General EMU is a part of the European Community ("E.C." or "Community"). The EMU Treaty provisions were added by the Treaty of Maastricht.7 As in the E.C. generally, the ultimate center for policy-making is the European Council, which pro- vides for the policy guidelines of EMU.' The European Council is composed of the heads of state or government of each EU 6. For a detailed analysis of EMU provisions in the E.C. Treaty, see RENE SMITS, THE EUROPEAN CENTRAL BANK - INSTITUTIONAL ASPECTS (1997); see also Jorn Pipkorn, Legal Arrangements in the Treaty of Maastricht for the Effectiveness of the Economic and Monetary Union, 31 COMMON MKT. L. REV. 263 (1994). 7. See Treaty on European Union, Feb. 7, 1992, O.J. C 224/1 (1992), [1992] 1 C.M.L.R. 719 [hereinafter TEU] (amending Treaty establishing the European Eco- nomic Community, Mar. 25, 1957, 298 U.N.T.S. 11, as amended by Single European Act, O.J. L 169/1 (1987), [1987] 2 C.M.L.R. 741 [hereinafter SEA]). The TEU, adopted as part of the Treaty of Maastricht, was signed at Maastricht, the Netherlands, on February 7, 1992, and entered into force on November 1, 1993. See id. 8. See E.C. Treaty, supra note 4, art. 8, O.J.
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